A key plank of financial management is the ability of a business to raise funds to finance investment and growth. There are different sources of funds that a company can seek. The management of these funds determines a business growth trajectory. Inappropriate sourcing may cause more harm than good. Lack of funding may prevent a business from attaining full potential and losing its market share. These decisions are essential for startup leaders. In this article, read about various sources of funds for your startup.
Venture capital is a recent trend in financing that entails the injection of funds into a promising venture in exchange for equity. Venture capitalists identify high potential businesses which they make the decision to fund, cash in at a super profit and exit the scene. To qualify for such financing, a business founder must cede some ground such as boardroom positions, business model and a degree of control. In exchange, the business will benefit from money, expertise and productive networks.
Not all startups may qualify for venture capital. Recent studies show that venture capital funds less than one per cent of startups. Another option is taking up commercial loans from banks. This entails presenting a business plan to a bank which then finances it on the strength of the plan and cash flow projections. The bank may decide to finance in instalments to mitigate the risk of default and over financing. The business remits repayment instalments as agreed with the financier.
This type of financing is a recent development that entails investors throwing money into a business venture showing a high degree of success, but that has not yet attracted any other form of funding. Angel investors, mostly individuals, get a stake in the business in exchange. As the startup picks up steam, the investors’ stake becomes more valuable, and so does the founders.